large number of firms of relatively equal
size and reaches its maximum of 10,000
points when a market is controlled by a
single firm. The HHI increases both as the
number of firms in the market decreases
and as the disparity in size between those
firms increases.
Let’s assume four coatings companies have the following SOM (
Share-of-Market) in the very concentrated
Automotive OEM market segment and
the two largest (XYZ & ABC) decide to
merge taking a total of 54.4% of the market in doing so.
The resultant HHI would be a prohibitively high figure of 3735 and calling
very rigid attention from the FTC in the
process.
Even considering the two lowest SOM
players (DEF & RST) at 21.0% and
16.4%, respectively, we find a higher than
FTC acceptable figure of 2949.
The agencies generally consider markets in which the HHI is between 1,500
and 2,500 points to be moderately concentrated, and consider markets in which
the HHI is in excess of 2,500 points to be
highly concentrated. Transactions that increase the HHI by more than 200 points
in highly concentrated markets are presumed likely to enhance market power
under the Horizontal Merger Guidelines
issued by the Department of Justice and
the Federal Trade Commission.
Market Concentration is often one
useful indicator of likely competitive effects of a merger. In evaluating market
concentration, the Agencies consider both
the post-merger level of market concentration and the change in concentration
resulting from a merger.
Market shares may not always fully
mirror the competitive consequence of
firms in the market or the impact of a
merger. They are used in conjunction with
other evidence of competitive effects.
When analyzing mergers between an in-
cumbent and a recent or potential entrant,
to the extent the Agencies use the change
in concentration to evaluate competitive ef-
fects, they will obviously do so using pro-
jected market shares. A merger between an
incumbent and a potential entrant can raise
significant competitive concerns. The less-
ening of competition resulting from such a
merger is more likely to be substantial, the
larger is the market share of the incumbent,
the greater is the competitive implication of
the potential entrant, and the larger is the
competitive threat posed by this potential
entrant relative to others.
The Agencies give more weight to mar-
ket concentration when market shares
have been stable over time, especially in
the face of historical changes in relative
prices or costs. If a firm has retained its
market share even after its price has in-
creased relative to those of its rivals, that
firm already faces limited competitive
constraints, making it less likely that its
remaining rivals will replace the competi-
tion lost if one of that firm’s important
rivals is eliminated due to a merger.
By contrast, even a highly concentrated
market can be very competitive if market
shares fluctuate substantially over short
periods of time in response to changes in
competitive offerings. However, if com-
petition by one of the merging firms has
significantly contributed to these fluctua-
tions, perhaps because it has acted as a
maverick, the Agencies will consider
whether the merger will enhance market
power by combining that firm with one
of its significant rivals.
The Agencies may measure market
concentration using the number of sig-
nificant competitors in the market. This
measure is most useful when there is a
gap in market share between significant
competitors and smaller rivals or when
it is difficult to measure revenues in the
relevant market. The Agencies also may
consider the combined market share of
the merging firms as an indicator of the
extent to which others in the market may
not be able readily to replace competition
between the merging firms that is lost
through the merger.
Based on their experience, and as
touched on above, the Agencies generally
classify markets into three types:
• Unconcentrated Markets: HHI below 1500
• Moderately Concentrated Markets:
HHI between 1500 and 2500
• Highly Concentrated Markets: HHI
above 2500
The Agencies employ the following
general standards for the relevant mar-
kets they have defined:
•Small Change in Concentration:
Mergers involving an increase in the
HHI of less than 100 points are un-
likely to have adverse competitive ef-
fects and require no further analysis.
• Unconcentrated Markets: Mergers resulting in unconcentrated markets are
unlikely to have adverse competitive
effects and require no further analysis.
• Moderately Concentrated Markets:
Mergers resulting in moderately
concentrated markets that involve
an increase in the HHI of more than
100 points potentially raise significant competitive concerns and often
warrant scrutiny.
•Highly Concentrated Markets:
Mergers resulting in highly concentrated markets that involve an increase in the HHI of between 100
points and 200 points potentially
raise significant competitive concerns
and often warrant scrutiny. Mergers
resulting in highly concentrated markets that involve an increase in the
HHI of more than 200 points will
be presumed to be likely to enhance
market power. The presumption may
be rebutted by persuasive evidence
showing that the merger is unlikely
to enhance market power.
Conclusion
The purpose of these index thresholds is
not to provide a rigid screen to separate
competitively benign mergers from an-ticompetitive ones, although high levels of concentration do raise concerns.
They actually provide one of several
methods to identify some mergers unlikely to raise competitive concerns and
some others for which it is particularly
important to examine whether other
competitive factors confirm, reinforce,
or counteract the potentially harmful
effects of increased concentration. The
higher the post-merger HHI and the increase in the HHI, the greater are the
Agencies’ possible competitive concerns
and the greater is the possibility that the
Agencies will request additional information to conduct their analysis. CW
